Cassie's Quilts alters, reconstructs and restores heirloom quilts. Cassie has just spent $800 purchasing, cleaning and reconstructing an antique quilt which she expects to sell for $1,500 once she is finished. After having spent $800, Cassie discovers that she would need some special period fabric that would cost her $200 in material and time in order to complete the task. Alternatively, she can sell the quilt "as is" now for $900. What is the marginal cost of completing the task? (Points : 1) $200 $500 $1,000 $1,000 plus the value of her time 2. Where do economic agents such as individuals, firms and nations, interact with each other? (Points : 1) in public locations monitored by the government. in any arena that brings together buyers and sellers. in any physical location people where people can physically get together for selling goods, such as shopping malls. in any location where transactions can be monitored by consumer groups and taxed by the government. 3. Consider the following two factors: These statements suggest that (Points : 1) it is highly likely that the average person will lose her job due to outsourcing. the likelihood that the average person will lose her job due to outsourcing is large small to losing her job due to other causes. the likelihood that the average person will lose her job due to outsourcing is very small compared to losing her job due to other causes. the US is not creating jobs fast enough to offset jobs lost due to outsourcing and other causes. 4. Cassie's Quilts alters, reconstructs and restores heirloom quilts. Cassie has just spent $800 purchasing, cleaning and reconstructing an antique quilt which she expects to sell for $1,500 once she is finished. After having spent $800, Cassie discovers that she would need some special period fabric that would cost her $200 in material and time in order to complete the task. Alternatively, she can sell the quilt "as is" now for $900. What should she do? (Points : 1) She should cut her losses and sell the quilt now. It does not matter what she does; she is going to take a loss on her project. She should purchase the period fabric, complete the task and then sell the quilt. She should not do anymore work on the quilt because she has already spent too much time on it and has not been paid for that time. 5. A grocery store sells a bag of potatoes at a fixed price of $2.30. Which of the following is a term used by economists to describe the money received from the sale of an additional bag of potatoes? (Points : 1) marginal revenue gross earnings pure profit marginal costs net benefit 6. A successful market economy requires well defined property rights and (Points : 1) balanced supplies of all factors of production. an ind.

1. Cassie's Quilts alters, reconstructs and restores heirloom quilts.
Cassie has just spent $800
purchasing, cleaning and reconstructing an antique quilt which
she expects to sell for $1,500 once she is finished. After having
spent $800, Cassie discovers that she would need some special
period fabric that would cost her $200 in material and time in
order to complete the task. Alternatively, she can sell the quilt
"as is" now for $900. What is the marginal cost of completing
the task? (Points : 1)
$200
$500
$1,000
$1,000 plus the value of her time
2. Where do economic agents such as individuals, firms and
nations, interact with each other? (Points : 1)
in public locations monitored by the government.
in any arena that brings together buyers and sellers.
in any physical location people where people can
physically get together for selling goods, such as shopping
malls.
in any location where transactions can be monitored by

2. consumer groups and taxed by the government.
3. Consider the following two factors:
These statements suggest that (Points : 1)
it is highly likely that the average person will lose her job
due to outsourcing.
the likelihood that the average person will lose her job due
to outsourcing is large small to losing her job due to other
causes.
the likelihood that the average person will lose her job due
to outsourcing is very small compared to losing her job due to
other causes.
the US is not creating jobs fast enough to offset jobs lost
due to outsourcing and other causes.
4. Cassie's Quilts alters, reconstructs and restores heirloom
quilts. Cassie has just spent $800 purchasing, cleaning and
reconstructing an antique quilt which she expects to sell for
$1,500 once she is finished. After having spent $800, Cassie

3. discovers that she would need some special period fabric that
would cost her $200 in material and time in order to complete
the task. Alternatively, she can sell the quilt "as is" now for
$900. What should she do? (Points : 1)
She should cut her losses and sell the quilt now.
It does not matter what she does; she is going to take a loss
on her project.
She should purchase the period fabric, complete the task
and then sell the quilt.
She should not do anymore work on the quilt because she
has already spent too much time on it and has not been paid for
that time.
5. A grocery store sells a bag of potatoes at a fixed price of
$2.30. Which of the following is a term used by economists to
describe the money received from the sale of an additional bag
of potatoes? (Points : 1)
marginal revenue
gross earnings
pure profit
marginal costs
net benefit

4. 6. A successful market economy requires well defined property
rights and (Points : 1)
balanced supplies of all factors of production.
an independent court system to adjudicate disputes based
on the law.
detailed government regulations.
a safety net to ensure that those who cannot participate in
the market economy can earn an income.
7.
Figure 2-11
Refer to Figure 2-11. Which two arrows in the diagram depict

5. the following transaction: Lizzie Haxem hires "The Paint Pros,"
a professional painting company, to paint her home. (Points : 1)
J and M
K and G
K and M
J and G
8. A production possibilities frontier with a bowed outward
shape indicates (Points : 1)
the possibility of inefficient production.
constant opportunity costs as more and more of one good is
produced.
increasing opportunity costs as more and more of one good
is produced.
decreasing opportunity costs as more and more of one good
is produced.
9.
Table 2-3

6. Table 2-3 shows the number of labor hours required to produce
a digital camera and a pound of wheat in China and South
Korea.
Refer to Table 2-3. What is South Korea's opportunity cost of
producing one pound of wheat? (Points : 1)
5 digital cameras
60 digital cameras
20 digital cameras
0.05 units of a digital camera

7. 10.
Table 2-3
Table 2-3 shows the number of labor hours required to produce
a digital camera and a pound of wheat in China and South
Korea.
Refer to Table 2-3. What is China's opportunity cost of
producing one pound of wheat? (Points : 1)
0.04 units of a digital camera
40 digital cameras
25 digital cameras
4 digital cameras

8. 11. All of the following are examples of spending on factors of
production in the circular flow model except (Points : 1)
Bima hires two students to work at his ice-cream store.
"Get Fit Together'" purchases 3 new treadmills for its gym.
Iris buys a dozen roses for her mother's birthday.
The Banyan Tree rents a much larger property so that it can
add a restaurant to its facilities.
12.
Figure 3-5
Refer to Figure 3-5. Assume that the graphs in this figure
represent the demand and supply curves for used clothing, an
inferior good. Which panel describes what happens in this

9. market as a result of a decrease in income? (Points : 1)
Panel (a)
Panel (b)
Panel (c)
Panel (d)
13. How does the increasing use of digital cameras affect the
market for traditional camera film? (Points : 1)
The demand curve for traditional camera film shifts to the
right.
The supply curve for traditional camera film shifts to the
left.
The supply curve for traditional camera film shifts to the
right.
The demand curve for traditional camera film shifts to the
left.
14.
Figure 3-6

10. Refer to Figure 3-6. The graph in this figure illustrates an initial
competitive equilibrium in the market for apples at the
intersection of D1 and S1 (point A). If there is a shortage of
apples how will the equilibrium point change? (Points : 1)
The equilibrium point will move from A to B.
The equilibrium point will move from A to C.
There will be no change in the equilibrium point.
The equilibrium point will move from A to E.
15. If in the market for apples the supply has decreased then
(Points : 1)
the supply curve for apples has shifted to the right.
there has been a movement upwards along the supply curve
for apples.

11. the supply curve for apples has shifted to the left.
there has been a movement downwards along the supply
curve for apples.
16. If the price of automobiles were to increase, then (Points :
1)
the demand for gasoline would decrease.
the demand for gasoline would increase.
the supply of gasoline would increase.
the quantity demanded of gasoline would decrease.
17.
Figure 4-7
Figure 4-7 shows the demand and supply curves for the almond
market. The government believes that the equilibrium price is

12. too low and tries to help almond growers by setting a price floor
at Pf.
Refer to Figure 4-7. What is the area that represents producer
surplus after the imposition of the price floor? (Points : 1)
A + B + E
B + E
B + E + F
B + C + D + E
18. Suppose the demand curve for a product is downward
sloping and the supply curve is upward sloping. If a unit tax is
imposed in the market for this product, (Points : 1)
sellers bear the entire burden of the tax.
the tax burden will be shared among the government,
buyers and sellers.
buyers bear the entire burden of the tax.
the tax burden will be shared by buyers and sellers.

13. 19.
Table 4-3
Table 4-3 shows the demand and supply schedules for the low-
skilled labor market in the city of Westover.
Refer to Table 4-3. If a minimum wage of $7.50 an hour is
mandated, what is the quantity of labor supplied? (Points : 1)
390,000
370,000
340,000
380,000

14. 20.
Figure 4-2
Refer to Figure 4-2. What area represents producer surplus at a
price of P2? (Points : 1)
A + B
B + D
A + B + C
A + B + C + D + E

15. 21. The difference between the highest price a consumer is
willing to pay for a good and the price the consumer actually
pays is called (Points : 1)
producer surplus.
the substitution effect.
the income effect.
consumer surplus.
22.
Figure 4-5
Refer to Figure 4-5. The figure above represents the market for
iced tea. Assume that this is a competitive market. If 20,000

16. units of iced tea are sold (Points : 1)
the deadweight loss is equal to economic surplus.
producer surplus equals consumer surplus.
the marginal benefit of each of the 20,000 units of iced tea
equals $3.
marginal benefit is equal to marginal cost.
23.
Figure 6-7
Refer to Figure 6-7. A perfectly inelastic supply curve is shown
in (Points : 1)
Panel A.

17. Panel B.
Panel C.
Panel D.
24. Suppose at the going wage rate of $20 per hour, firms can
hire as many hours of janitorial services as it desires. If any
firm tries to lower the wage rate to $19, it will not be able to
hire any janitor. What does this indicate about the supply of
janitorial services curve? (Points : 1)
Supply is unit price elastic.
Supply is perfectly price elastic.
Supply is perfectly price inelastic.
Supply is relatively price inelastic.
25. When demand is unit price elastic, a change in price causes
total revenue to stay the same because (Points : 1)
the percentage change in quantity demanded exactly offsets
the percentage change in price.
buyers are buying the same quantity.

18. total revenue never changes with price changes.
the change in profit is offset by the change in production
cost.
26. Which of the following statements about the price elasticity
of demand is correct? (Points : 1)
The elasticity of demand for a good in general is equal to
the elasticity of demand for a specific brand of the good.
The absolute value of the elasticity of demand ranges from
zero to one.
Demand is more elastic in the long run than it is in the
short run.
Demand is more elastic the smaller percentage of the
consumer's budget the item takes up.
27. If the percentage change in price is 20 percent and the value
of the price elasticity of demand is -5, then quantity demanded
(Points : 1)
will increase by 100 percent.
will increase by 5 percent.

19. will decrease by 100 percent.
impossible to determine without additional information.
28.
Table 10-2
Table 10-2 shows cost data for Lotus Lanterns, a producer of
whimsical night lights.
Refer to Table 10-2. What is the average variable cost per unit
of production when the firm produces 90 lanterns? (Points : 1)
$490

20. $33.67
$7.67
$5.40
29.
Figure 10-7
Refer to Figure 10-7. The lines shown in the diagram are isocost
lines. Which of the following shows an increase in the firm's
total cost budget while the price of labor and capital remain
unchanged? (Points : 1)
the movement from CE to BF
the movement from CE to AF
the movement from BD to AF
the movement from BD to CE

21. 30. A firm has successfully adopted a positive technological
change when (Points : 1)
it can produce more output using the same inputs.
it produces less pollution in its production process.
can pay its workers less yet increase its output.
it sees an increase in worker productivity.
31. Which of the following is an example of a long run
adjustment? (Points : 1)
Your university offers Saturday morning classes next fall.
Ford Motor Company lays off 2,000 assembly line workers.
A soybean farmer turns on the irrigation system after a
month long dry spell.
Wal-Mart builds another Supercenter.

22. 32. The difference between technology and technological
change is that (Points : 1)
technology refers to the processes used by a firm to
transform inputs into output while technological change is a
change in a firm's ability to produce a given level of output with
a given quantity of inputs.
technology is carried out by firms producing physical
goods but technological change is an intellectual exercise into
seeking ways to improve production.
technology is product-centered, that is, developing new
products with our limited resources while technological change
is process-centered in that it focuses on developing new
production techniques.
technology involves the use of capital equipment while
technological change requires the use of brain power.
33. The formula for total fixed cost is (Points : 1)
TFC = TC + TVC.
TFC = TVC - TC.
TFC = TC/TVC.
TFC = TC - TVC.

23. 34.
Figure 11-1
Refer to Figure 11-1. If the firm is producing 200 units, (Points
: 1)
it breaks even.
it is making a loss.
it should cut back its output to maximize profit.
it should increase its output to maximize profit.
35. Assume that price is greater than average variable cost. If a

24. perfectly competitive seller is producing at an output where
price is $11 and the marginal cost is $14.54, then to maximize
profits the firm should (Points : 1)
continue producing at the current output.
produce a larger level of output.
produce a smaller level of output.
not enough information given to answer the question.
36.
Figure 11-1
Refer to Figure 11-1. If the firm is producing 700 units, what is
the amount of its profit or loss? (Points : 1)

25. loss of $280
loss equivalent to the area A.
profit equivalent to the area A.
There is insufficient information to answer the question.
37. The demand for each seller's product in perfect competition
is horizontal at the market price because (Points : 1)
each seller is too small to affect market price.
the price is set by the government.
all the sellers get together and set the price.
all the demanders get together and set the price.
38. For a perfectly competitive firm, at profit maximization
(Points : 1)
market price exceeds marginal cost.
total revenue is maximized.
marginal revenue equals marginal cost.

26. production must occur where average cost is minimized.
39. A monopoly is characterized by all of the following except
(Points : 1)
there are only a few sellers each selling a unique product.
entry barriers are high.
there are no close substitutes to the firm's product.
the firm has market power.
40. Economic efficiency requires that a natural monopoly's
price be (Points : 1)
equal to average total cost where it intersects the demand
curve.
equal to marginal cost where it intersects the demand
curve.
equal to average variable cost where it intersects the
demand curve.
equal to the lowest price the firm can charge and still make
a normal profit.

27. 41.
Table 14-2
Shakti Inc. has been granted a patent for its arnica toothache
balm. Table 14-2 shows the demand and the total cost schedule
for the firm.
Refer to Table 14-2. What is Shakti's profit-maximizing output?
(Points : 1)
4 units
5 units

28. 6 units
7 units
42. A patent or copyright is a barrier to entry based on (Points :
1)
ownership of a key necessary raw material.
large economies of scale as output increases.
government action to protect a producer.
widespread network externalities.
43. The Aluminum Company of America (Alcoa) had a
monopoly until the 1940s because (Points : 1)
it was a public enterprise.
it had a patent on the manufacture of aluminum.
the company had a secret technique for making aluminum
from bauxite.
it had control of almost all available supply of bauxite.

29. 44. A possible advantage of a horizontal merger for the
economy is that (Points : 1)
the merging firms could avoid losses.
the merged firm might reap economies of scale which could
translate into lower prices.
the degree of competition in the industry will be
intensified.
the government stands to collect more corporate income tax
revenue.
45.
Table 12-2

30. Eco Energy is a monopolistically competitive producer of a
sports beverage called Power On. Table 12-2 shows the firm's
demand and cost schedules.
Refer to Table 12-2. What is likely to happen to the product's
price in the long run? (Points : 1)
It will fall.
It will increase.
It will remain constant.
Cannot be determined without information on its long run
demand curve.
46. In the long run, if price is less than average cost, (Points :
1)
there is an incentive for firms to exit the market.
there is profit incentive for firms to enter the market.
the market must be in long-run equilibrium.
there is no incentive for the number of firms in the market
to change.

31. 47.
Table 12-3
Table 12-3 shows the firm's demand and cost schedules for a
firm in monopolistic competition.
Refer to Table 12-3. What is the best course of action for the
firm in the short run? (Points : 1)
It should shut down.
It should stay in business because it covers some of its
fixed cost.

32. It should increase its sales by lowering its price.
It should not cut its price but it should increase its sales by
advertising.
48. Long run equilibrium under monopolistic competition is
similar to that under perfect competition in that (Points : 1)
firms produce at the minimum point of their average cost
curves.
price equals marginal cost.
firms earn normal profits.
price equals marginal revenue.
49.
Figure 12-4

33. Refer to Figure 12-4. The firm represented in the diagram is
currently selling Qa units at a price of $Pa. Is this firm
maximizing its profit and if it is not, what would you
recommend to the firm? (Points : 1)
Yes, it is maximizing its profit by charging the highest
price possible.
No, it is not; since its marginal cost is constant, it should
produce and sell as much as it can. It should sell Qd units at a
price of $Pd.
No, it is not; it should lower its price to $Pc and sell Qc
units.
No, it is not; it should lower its price to $Pb and sell Qb
units.
50. The DeBeers Company of South Africa was able to block
competition through (Points : 1)
economies of scale.
ownership of an essential input.
government-imposed barriers.
differentiating its product.

34. 51. One reason why, in the last four decades, the number of new
auto makers in the world has been very small compared to the
past is that (Points : 1)
the automobile cannot be improved upon in any way by
new producers.
new auto makers cannot obtain necessary inputs to produce
new cars.
governments restrict who can produce automobiles.
new producers cannot match the economies of scale of
existing auto makers.
52. What is a prisoners' dilemma? (Points : 1)
a game that involves no dominant strategies
a game in which prisoners are stumped because they cannot
communicate with each other
a game in which players act in rational, self-interested
ways that leave everyone worse off
a game in which players collude to outfox authorities

35. 53. Consider two oligopolistic industries selling the same
product in different locations. In the first industry, firms always
match price changes by any other firm in the industry. In the
second industry, firms always ignore price changes by any other
firm. which of the following statements is true about these two
industries, holding everything else constant? (Points : 1)
Market prices are likely to be higher in the first industry in
which firms always match price changes by rival firms than in
the second where firms ignore their rivals' price changes.
Market prices are likely to be lower in the first industry
where firms always match price changes by rival firms than in
the second where firms ignore their rivals' price changes.
Market prices are likely to be the same in both markets
because they are both oligopolistic markets.
No conclusions can be drawn about the pricing behavior
under these very different firm behavior.
54. OPEC periodically meets to agree to restrict the cartel's oil
output, and yet almost every member of OPEC produces more
than its own output quota. This suggests that OPEC has a
(Points : 1)
cooperative equilibrium.
noncooperative equilibrium.

36. new potential entrants.
threat of substitute goods.
55.
Table 13-5
Suppose OPEC has only two producers, Saudi Arabia and
Nigeria. Saudi Arabia has far more oil reserves and is the lower
cost producer compared to Nigeria. The payoff matrix in Table
13-5 shows the profits earned per day by each country. "Low
output" corresponds to producing the OPEC assigned quota and
"high output" corresponds to producing the maximum capacity
beyond the assigned quota.
Refer to Table 13-5. What is the Nash equilibrium in this game?

37. (Points : 1)
In the Nash equilibrium both Saudi Arabia produce a low
output and earn a profit of $100 million and $20 million
respectively.
In the Nash equilibrium both Saudi Arabia produce a high
output and earn a profit of $60 million and $20 million
respectively.
In the Nash equilibrium Saudi Arabia produces a low
output and earns a profit of $80 million and Nigeria produces a
high output and $30 million respectively.
There is no Nash equilibrium.
56. Economic discrimination takes place when an employer
(Points : 1)
pays workers the lowest wage possible.
pays workers different wages on the basis of some arbitrary
characteristics of workers that are irrelevant to the job
performed.
pays lower wages to workers who are not as productive as
other workers.
pays workers compensating wage differentials.

38. 57. Painters who paint water towers earn higher wages relative
to painters who paint houses because (Points : 1)
the demand for tower painters is greater than the demand
for residential painters.
painting water towers is more risky than painting houses.
the tower painters' union is probably more powerful than
the wall painters' union.
the supply of water tower painters exceeds the supply of
wall painters.
58. Which of the following is a reason why some firms do not
use commission pay? (Points : 1)
It gives workers incentive to produce more.
It increases firm profits.
It is difficult to measure the output and attribute output to
a particular worker.
The best workers stay and less productive workers leave.

39. 59. The town of Saddle Peak has a fixed supply of mountain
view lots. In this case, the price per square foot of mountain
view lots is (Points : 1)
determined only by supply.
determined only by demand.
set by government officials of Saddle Peak.
negotiated by environmental groups and property
developers.
60. Worker discrimination occurs when (Points : 1)
workers refuse to perform risky tasks.
workers refuse to work with persons of a different race.
customers refuse to buy products produced by a racially
diverse workforce.
employers pay different employees different wages based
on race.
61. According to the signaling hypothesis, (Points : 1)
signaling about job openings occur in help wanted

40. classified ads.
a college diploma signals to employers that a person has
certain desirable characteristics.
a slowdown in output signals to companies the need to hire
more labor.
a high unemployment rate is a signal to the government to
take some policy action.
62. If Molly Bee increases her work hours when her wage
increases, then (Points : 1)
the income effect of the wage increase outweighs the
substitution effect.
the substitution effect of the wage increase outweighs the
income effect.
leisure is an inferior good to Molly.
Molly' is spending beyond her means.
63. Suppose a competitive firm is paying a wage of $12 an hour
and sells its product at $3 per unit. Assume that labor is the
only input. If, hiring another worker would increase output by
three units per hour, then to maximize profits the firm should

41. (Points : 1)
not change the number of workers it currently hires.
not hire an additional worker.
hire another worker.
There is not enough information to answer the question.
64. Suppose a competitive firm is paying a wage of $12 an hour
and sells its product at $3 per unit. Assume that labor is the
only input. If the last worker hired increases output by three
units per hour, then to maximize profits the firm should (Points
: 1)
not change the number of workers it currently hires.
lay off some of its workers.
hire additional workers.
There is not enough information to answer the question.
65.
Table 16-2

42. Refer to Table 16-2. What is the profit-maximizing quantity of
labor that the firm should hire? (Points : 1)
5 units
$4 units
$3 units
2 units
66.
Table 16-2

43. Refer to Table 16-2. The marginal revenue product from the
third unit of labor is (Points : 1)
$5,460.
$1,560.
$1,260.
$780.
67.
Table 19-10

44. Consider the data shown above for a fictional economy that
produces only two products: oranges and shirts.
Refer to Table 19-10. Nominal GDP for this fictional economy
for 1998 equals (Points : 1)
$4,620.
$5,100.
$5,300.
$5,850.
68. Disposable personal income equals personal income (Points
: 1)
minus personal tax payments.
plus government transfer payments.
minus personal tax payments plus government transfer
payments.
minus government transfer payments plus personal tax
payments.

45. 69.
Table 19-8
Consider the following data for a fictional economy that
produces only two products: guns and butter.
Refer to Table 19-8. Nominal GDP for this fictional economy in
2006 equals (Points : 1)
$1,140.
$880.

46. $690.
$560.
70. The Philippines and Vietnam have roughly the same size
population. Suppose the GDP of the Philippines is $1,000
billion and the GDP of Vietnam is $10,000 billion. You should
conclude (Points : 1)
a typical person in Vietnam is 10 times as well off as the
typical person in the Philippines.
a typical person in Vietnam is more than 10 times as well
off as the typical person in the Philippines.
a typical person in Vietnam is less than 10 times as well
off as the typical person in the Philippines.
it is not possible to make a good comparison of the
economic well being of a typical individual in the 2 countries
without additional information.
71. If prices in the economy rise, then (Points : 1)
the purchasing power of a dollar rises.
the purchasing power of a dollar stays constant.

47. the purchasing power of a dollar declines.
the purchasing power of a dollar cannot be determined.
72. Since 1950, expansions in the United States have become
________, while recessions have become ________. (Points : 1)
longer; longer
shorter; shorter
shorter; longer
longer; shorter
73. The response of firm investment to an increase in the
government budget deficit is called (Points : 1)
expansionary investment.
private dissaving.
crowding out.
income minus net taxes.

48. 74. What two factors are the keys to determining labor
productivity? (Points : 1)
the business cycle and the growth rate of real GDP
the growth rate of real GDP and the interest rate
technology and the quantity of capital per hour worked
the average level of education of the workforce and the
price level
75. Since 1900, real GDP in the U.S. has grown (Points : 1)
more rapidly than the population.
more slowly than the population.
as rapidly as the population.
in a random unpredictable manner relative to the
population.
76.

49. Scenario 21-1
Consider the following data for a closed economy:
Refer to Scenario 21-1. Based on the information above, what is
the level of private saving in the economy? (Points : 1)
$3 trillion
$4 trillion
$5 trillion
$8 trillion
77. If net taxes fall by $80 billion, we would expect (Points : 1)

50. the government deficit to fall by $80 billion.
household savings to rise by $80 billion.
household savings to rise by less than $80 billion.
household savings to fall by more than $80 billion.
78. Which of the following would decrease the unemployment
rate? (Points : 1)
an increase in the minimum wage
an increase in the efficiency wage
an increase in labor union membership
government aid to retrain unemployed workers
79. Suppose that at the beginning of a loan contract, the real
interest rate is 4% and expected inflation is currently 6%. If
actual inflation turns out to be 7% over the loan contract period,
then (Points : 1)
borrowers gain 1%.
lenders gain 1%.

51. borrowers lose 3%.
lenders gain 3%.
80. Suppose that homemakers are included as employed in the
labor force statistics, rather than being counted as out of the
labor force. This would (Points : 1)
increase the measured unemployment rate.
increase the measured labor force participation rate.
decrease the number of persons in the labor force.
decrease the number of persons in the working-age
population.
81. Creative destruction means that (Points : 1)
firms develop new products that replace old products in the
economy, thereby encouraging economic growth.
economic growth can only be sustained if capital
depreciates rapidly.
knowledge capital can be created through a system of
government subsidies for education and research and

52. development.
research and development should only be financed if
research and development is incremental (a result of making
small changes to existing products).
82. Extensive economic growth ________ output per worker at
a(n) ________ rate due to diminishing marginal returns. (Points
: 1)
increases; decreasing
decreases; decreasing
increases; increasing
decreases; increasing
83. By offering more generous unemployment insurance
programs, European countries can expect (Points : 1)
to pay less in taxes than in the United States.
workers to gain new skills quickly in response to
fluctuations in the labor market.
shorter periods of unemployment for their workers.

53. longer periods of unemployment for their workers.
84. The industrialized group of countries has growth rates that
are consistent with the findings of the economic growth model.
That is, Ireland and Japan had ________ incomes in 1960 than
the U.S. and Switzerland, and Ireland and Japan grew ________
than the U.S. and Switzerland between 1960 and 2004. (Points :
1)
lower; more rapidly
greater; less rapidly
lower; less rapidly
greater; more rapidly
85. Which of the following is a true statement about the
multiplier? (Points : 1)
The formula for the multiplier overstates the real world
multiplier when we take into account the impact of changes in
GDP on imports, inflation and the interest rate.
The larger the MPC, the smaller the multiplier.
The multiplier is the ratio of the change in spending to the
change in GDP.

54. The multiplier makes the economy less sensitive to changes
in autonomous expenditure.
86. Which of the following is a reason why increases in the
price level results in a decline in aggregate expenditure? (Points
: 1)
Price level increases raise real wealth which causes
consumption spending and aggregate expenditures to decline.
Price level increases cause firms and consumers to hold
more money, which raises the interest rate. Higher interest rates
lower consumption and planned investment expenditures, which
lowers aggregate expenditures.
Price level increases in the U.S. relative to other countries,
raise net exports, which lowers aggregate expenditures.
As the price level rises, government spending falls, which
lowers aggregate expenditures.
87. Macroeconomic equilibrium occurs when (Points : 1)
aggregate expenditure = GDP.
aggregate expenditure = C+ I + G + net transfers.

55. aggregate income = planned inventories.
aggregate income = planned inventories.
88. If economists forecast a decrease in aggregate expenditure,
which of the following is likely to occur? (Points : 1)
GDP will rise.
GDP will fall.
Wages will rise.
Inventories will fall.
89. The sale of Treasury securities by the Federal Reserve will,
in general, (Points : 1)
not change the money supply.
not change the quantity of reserves held by banks.
increase the quantity of reserves held by banks.
decrease the quantity of reserves held by banks.

56. 90. Suppose a bank has $100 million in checking account
deposits with no excess reserves and the required reserve ratio
is 20 percent. If the Federal Reserve reduces the required
reserve ratio to 15 percent, then the bank will now have excess
reserves of (Points : 1)
$0.
$5 million.
$15 million.
$20 million.
91. You earn $500 a month, currently have $200 in currency,
$100 in your checking account, $2,000 in your savings
accounts, $3,000 worth of illiquid assets and $1,000 of debt.
You have (Points : 1)
money = $2,300, annual income = $6,000, and wealth =
$5,000.
money = $300, annual income = $6,000, and wealth =
$4,300.
money = $200, annual income = $500, and wealth = $4,300.
money = $300, annual income = $6,000, and wealth =
$5,000.

57. 92.
Scenario 25-2
Imagine that Kristy deposits $10,000 of currency into her
checking account deposit at Bank A and that the required
reserve ratio is 20%.
Refer to Scenario 25-2. Suppose you withdraw $500 from your
checking account deposit and bury it in a jar in your backyard.
If the required reserve ratio is 10 percent, checking account
deposits in the banking system as a whole could drop up to a
maximum of (Points : 1)
$0.
$50.
$500.
$5,000.

58. 93. Which of the following would be most likely to induce the
Federal Reserve to conduct expansionary monetary policy? A
significant decrease in (Points : 1)
oil prices.
business taxes.
income tax rates.
investment spending.
94. If the probability of losing your job remains ________, a
recession would be a good time to purchase a home because the
Fed usually ________ interest rates during this time. (Points :
1)
low; lowers
low; raises
high; lowers
high; raises
low; does not change

59. 95. Inflation targeting refers to conducting ________ policy so
as to commit the central bank to achieving a ________. (Points :
1)
fiscal; publicly announced level of inflation
fiscal; zero inflation rate
monetary; publicly announced level of inflation
monetary; zero inflation rate
96. Which of the following describes a similarity between the
current European residential housing and mortgage market and
the U.S. residential housing and mortgage market? (Points : 1)
The housing markets in both geographic areas are slowing
down after a long period of growth and rapidly rising prices.
Both have central banks that have raised the lending rate
by a factor of 2 since a few years ago.
The majority of new mortgages issued in both markets are
the long-term, fixed rate variety.
Most banks in both geographic regions do not offer home-
equity withdrawals.

60. 97. Which of the following would be classified as fiscal policy?
(Points : 1)
The federal government passes tax cuts to encourage firms
to reduce air pollution.
The Federal Reserve cuts interest rates to stimulate the
economy.
A state government cuts taxes to help the economy of the
state.
The federal government cuts taxes to stimulate the
economy.
States increase taxes to fund education.
98. From an initial long-run equilibrium, if aggregate demand
grows more slowly than long-run and short-run aggregate
supply, then the president and the Congress would most likely
(Points : 1)
increase the required reserve ratio and decrease
government spending.
decrease government spending.
decrease oil prices.

61. decrease taxes.
lower interest rates.
99. The Federal Reserve plays a larger role than the president
and the Congress in stabilizing the economy because (Points :
1)
the Federal Reserve can more quickly change monetary
policy than the president and the Congress can change fiscal
policy.
the Federal Reserve can immediately recognize when the
economy is below or above potential.
changes in interest rates have a considerably larger effect
on the economy than changes in government purchases or taxes.
changes in interest rates have their full effect on the
economy in a short period of time, whereas changes in
government spending and taxes have their full effect over a long
period of time.
100. The use of fiscal policy to stabilize the economy is limited
because (Points : 1)
changes in government spending and tax rates have a small
effect on aggregate demand.

62. changes in government spending and tax rates have a small
effect on interest rates.
the legislative process can be slow, which means that it is
difficult to make fiscal policy actions in a timely way.
the Internal Revenue Service (IRS) resists changes in tax
rates, because of all the changes they would have to make to the
tax code.